Xbox in Japanese Train Wreck

There is an interesting article on Gamespy about sales of console game units. This is relevant to an OS oriented forum because of the underlying struggle for real estate. Both Sony and Microsoft covet the space on top of your TV. The so-called “set top box” is seen by both as the key to dominating the converging worlds of entertainment, communication and computing.Sony may or may not have stumbled onto this realization after it introduced the first PlayStation. Even if it wasn’t part of a master plan, they clearly realized by 1996 that they had a great opportunity. Thus the PlayStation2 which was the first mass-market entertainment computer. The PlayStation2, Clie and Vaio are almost identical in kind even if very different in detail.

Sony owns the high-end of consumer electronics, and anything that might be so described is a target market for them. I’ve competed against Sony in the broadcast market. Although they are not supermen, they win more often than they lose, and I gained a great respect for the company and its products. They don’t have a single grand plan for world domination. That’s not how they do things. Instead, they look for progressive opportunities, and places where they can establish new standards. They want to be leaders and are genuine in their encouragement of new markets.

Sony wants to own the underlying technology in every market as much as possible. But when they get that ownership, they don’t use it to stifle competition. They like to charge a toll. The better the market does, the more tolls they collect. For example, Sony co-owns the Audio CD standard with Phillips. Every audio CD produced generates a cent or two for Sony and Phillips. Sony hates to use other people’s standards. That’s why Sony devices take the proprietary Memory Stick. This style of benign dictatorship has worked very well for the whole consumer electronics industry. It will probably continue to work as long as wise and cool heads rule at Sony.

The Beta/VHS war scarred Sony deeply. They have never forgotten or gotten over it. The lesson they learned was to never again let such a prize slip their grasp. They also learned that they can’t win that kind of battle through confrontation alone. They are now past masters at getting industry support for standards more often than not owned by Sony. That is no easy task in the hyper-competitive Japanese market. But they’ve done it more than once. Don’t get the impression that Sony are all nice guys and gals. They are utterly ruthless when they need to be. Nobody gets what Sony’s got by being soft.

Microsoft, on the other hand, is a 2 hit wonder. They make gobs of money from Windows and Office and lose gobs of money on everything else. Gates and Ballmer have been looking since the late 1990s to expand MS’ base beyond the PC. They recognized early that the PC market was headed towards saturation. To keep growing, they had to find new markets. That’s why they’ve poured money into Cable TV and phones, among other things. Gates was also smart enough to grasp the importance of the set top box. Long before people listened to music on their computers, he saw that a computer like device would become the hub of home entertainment. He also saw Sony running away with the prize. There was not much to do but chase them. Gates was astute enough to see that Sony would never be an ally in consumer electronics.

MS determined that the path of least resistance was a game console. It would be hard to convince people to buy a computer to run their entertainment systems. But it would not be hard to convince them to buy a computer to run their games with. Microsoft’s first pass at the market was in partnership with Sega. The doomed Dreamcast ran a version of Windows CE. But Sega went bust. So MS embarked on the Xbox. It would be the thin end of an MS wedge to take control of entertainment. This explains the seemingly bizarre move by a software company into the home electronics market. And it is a very different kind of market. With razor thin margins, punishing upgrade cycles, nasty channel partners and huge fixed costs, it is not a business for the meek. But that’s OK, Microsoft is not meek. And it has deep pockets. It would need them.

Sony got a big jump with the PS2, and MS had to leap-frog the technology to be taken seriously. Given their inexperience and the pace of the market, the Xbox is a pretty impressive achievement. But MS couldn’t figure out how to get the trade-offs right. Its very difficult to meet the hardware goals and still hit their price point. The result is a rumored US$100-US$130 loss per unit. And that was at a US$299 price point. These days, an Xbox with a game and online kit goes for US$179. In contrast, both Sony and Nintendo make money on their respective consoles. One would expect a significant decrease in cost to produce the Xbox between its launch 2 years ago and today. But unit sales have been less than half what was expected. A nasty public squabble with Nvidia last year suggest the losses continue.

When the Xbox launched in November 2001, MS forecast as many as 6 million units installed by end June 2002, and parity with the PS2 in 2003. That has not happened. The remarkable table below is from the Gamespy article and has been painstakingly assembled by their correspondent Ara Shirinian. It shows clearly that MS has failed utterly to put a dent into the Playstation. The PS2 has far outsold both the Xbox and GameCube combined.

Even more significant is the second table. This confirms figures I’ve seen elsewhere for the first six months of 2003. The Xbox was outsold in the first week of September in Japan by the PS1!!! Conventional industry wisdom holds Japan is the most important market for consoles, because that’s where the most popular games come from. If Japanese kids aren’t using a particular console, Japanese game companies won’t be making games for it. The failure there has been complete and total. So grand that its hard to see how MS could ever launch a successful device there in the future. Another tough reality in this market is the diffusion of power. No one company holds the kind of sway MS is used to holding in the PC arena. So credibility matters. It matters when wooing developers to make games for your platform. It matters when trying to get shelf space at retailers. It matters when trying to get the lowest possible cost with OEM factories in Taiwan. Money talks, but it doesn’t buy respect with these people.

The conventional wisdom also says there is room for only two consoles at any one time. #3 always gets squeezed out. However, MS has such deep pockets that they can certainly outlast Nintendo if they want to. Even so, Nintendo is only one mega-hit game away from pushing Xbox into third place in North America. If that were to happen, embarrassment might force Ballmer’s hand where money did not.

Estimated Current Installed Base (Various Sources)
Console North America Japan Europe and others Total
PlayStation 2 26,420,000 14,170,000 19,400,000 59,990,000
GBA 14,540,000 9,240,000 7,920,000 31,700,000
GBA-SP 830,000 820,000 460,000 2,110,000
GameCube 5,130,000 2,470,000 1,950,000 9,550,000
Xbox 6,200,000 1,000,000 2,200,000 9,400,000

Units Sold, Sep. 1-7 2003, Japan only
GBA-SP 38,872 (41.1%)
PlayStation 2 29,248 (30.9%)
GameCube 16,841 (17.8%)
GBA 8,132 (8.6%)
PSOne 531 (0.6%)
Xbox 530 (0.5%)
WonderSwan Crystal 302 (0.3%)
WonderSwan Color 90 (0.1%)
Source: Media Create


  1. 2003-09-23 7:53 pm
  2. 2003-09-23 7:54 pm
  3. 2003-09-23 7:56 pm
  4. 2003-09-23 8:00 pm
  5. 2003-09-23 8:06 pm
  6. 2003-09-23 8:06 pm
  7. 2003-09-23 8:07 pm
  8. 2003-09-23 8:20 pm
  9. 2003-09-23 8:24 pm
  10. 2003-09-23 8:41 pm
  11. 2003-09-23 8:43 pm
  12. 2003-09-23 8:47 pm
  13. 2003-09-23 8:49 pm
  14. 2003-09-23 8:58 pm
  15. 2003-09-23 9:03 pm
  16. 2003-09-23 9:03 pm
  17. 2003-09-23 9:05 pm
  18. 2003-09-23 9:20 pm
  19. 2003-09-23 9:23 pm
  20. 2003-09-23 9:25 pm
  21. 2003-09-23 9:45 pm
  22. 2003-09-23 10:16 pm
  23. 2003-09-23 10:24 pm
  24. 2003-09-23 10:47 pm
  25. 2003-09-23 11:52 pm
  26. 2003-09-24 12:22 am
  27. 2003-09-24 12:47 am
  28. 2003-09-24 1:13 am
  29. 2003-09-24 1:32 am
  30. 2003-09-24 2:01 am
  31. 2003-09-24 3:03 am
  32. 2003-09-24 3:18 am
  33. 2003-09-24 3:51 am
  34. 2003-09-24 9:38 am
  35. 2003-09-24 9:41 am
  36. 2003-09-24 9:48 am
  37. 2003-09-24 10:59 am
  38. 2003-09-24 12:45 pm
  39. 2003-09-24 1:19 pm
  40. 2003-09-24 1:40 pm
  41. 2003-09-24 2:06 pm
  42. 2003-09-24 4:16 pm
  43. 2003-09-24 4:21 pm
  44. 2003-09-24 7:32 pm
  45. 2003-09-24 10:22 pm
  46. 2003-09-25 8:27 am
  47. 2003-09-30 6:13 am